Franchising and Other Approaches That Can Contribute to Mc Donalds Success - Case Study Example

Table of contents

Introduction2

Company background2

Main analysis3

Franchising3

Problems of franchising6

Competition7

Porter’s five forces model8

Conclusion9

Recommendations10

Bibliography 12

Introduction

Companies operate in a dynamic environment that is characterised by competition during the contemporary period. In order for them to gain competitive advantage, there is need to implement various strategies in their operations that cannot be easily matched by other competitors. Michael Porter, apparently a strategy expert and professor at Harvard Business School states that strategy defines and communicates an organization’s unique position and it should also determine how the organizational resources, competencies and skills should be combined to create competitive advantage (MindTools, 2016). As such, this paper analysis McDonald’s business model referred to as the “System” which has its strong roots in franchising as a strategy to establish the extent to which it has functioned as an effective strategic tool used by the company to gain large market share in the market. The paper starts by discussing the company background which will be followed by the main analysis of the strategy utilized by the company in its operations that has contributed to its success in the fast foods industry.

Company background

McDonald's is the world's leading global food service retailer with over 36,000 locations in over 100 countries (McDonalds, 2016). The other issue about this company is that more than 80% of its restaurants are independently owned and operated by local business people across the whole world. The company’s menu includes: “hamburgers and cheeseburgers, the Big Mac, Quarter Pounder with Cheese, and Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, Snack Wraps, French fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft-serve cones, pies, soft drinks, coffee, McCafé beverages, and other beverages,” (Neilson, 2016). It can also be observed that the company also offers certain products like the McRib sandwich on a seasonal basis and these help to appeal to the interests of the customers.

Main analysis

McDonald’s strength mainly comes from its alignment of the suppliers and the franchisees and this has been collectively referred to as the "System" that has been key to the company’s long-term success (McDonald’s 2016). Through leveraging on this system, McDonalds has been able to identify, implement and scale ideas that are capable of meeting the customers’ constantly changing needs. The overall vision of the company is to become a modern burger firm that delivers the customer experience through taking the brand to areas where it is supposed to be and progressing with improving the brand in order to be in a better position to meet the expectations of the customers in different markets where it operates. The company primarily focuses on the customers and what matters most to them. In other words, franchising is an effective strategy as going to be explained in detail below.

Franchising

Franchising involves a contractual agreement where a franchisee is given the authority by a franchisor to use their trademark while selling the brand that originally belongs to the franchisor (Kotler and Armstrong, 2010). This agreement is followed by payment of franchise fees by the franchisee and they have no legal authority to alter the brand or trademark of the franchisor. There are many advantages of this strategy in business where the franchisor can gain large market share as a result of the fact that many shops operated by different individuals would operate within the market. This helps to increase the visibility of the company in the market that is often characterised by stiff competition. The other advantage to the franchisor is that they will also generate revenue from franchise fees that are charged to all the individuals who use its trademark in doing their business. In other words, the brand gets widespread recognition from different people across the globe which may not be possible if the company sticks to its own operated stores. Setting business in different parts of the globe may be quite challenging as a result of the numerous expenses that are involved. To a larger extent, a company that uses the strategy of franchising as its business model like McDonalds is in a better position to attract many customers while it concentrates on improving is brand so that it can operate competitively in the market.

According to its official website, the power of McDonald’s franchisees, suppliers and working together towards a common goal has made the company to become the world’s leading quick service restaurant. The franchisees play a significant role in motivating the communities to become entrepreneurs and these help top popularize the brand in question. On the other hand, the company plays a pivotal role in facilitating learning across its restaurants located in different parts of the globe. McDonald’s offers a global brand that is a force to reckon with and one interesting this about its success can be attributed to the franchising strategy. More than 80 % of the company’s restaurants across the globe are owned and operated by more than 5000 independent, small and mid-sized businessmen and women (McDonalds, 2016). In the case of McDonald’s, it can be noted that the franchisees are locals who live in the communities they serve and this means that they are committed to make a positive impact through providing quality food that appeals to the needs and interests of the targeted consumers. These franchises also play a pivotal role in supporting charity work through giving back part of their profits to the needy people in their respective communities. This is quite a good gesture by the franchisees since their action will go a long way in creating trust among the local members such that they can happily identify with the brand.

Additionally, the business model of franchising has significantly helped McDonald's to be in a better position to become an integral part of the larger societies in which it operates through consistently delivering locally-relevant restaurant experiences to the consumers (McDonald’s, 2016). It can also be seen that the cornerstone of the system that leverages on franchising is the company’s powerful and enduring brand that has become a force to reckon with in the fast food industry. The franchise model is also unique in that it is designed to empower the local entrepreneurs who have the knowledge about what the customers want and really expect from the company. This strategy has also significantly helped the company to differentiate itself from the other competitors in the market since it has successfully operated in different parts of the globe producing almost similar results. This has also given the company competitive advantage over the other rival players in this particular industry.

The focus of the company is to offer valuable products to the customers so that it can maintain its position in the market. This entails that it is people driven and in order to achieve this status, the company focuses on maintaining values through its franchises. These are the face of the company and they make an effort to appeal to the interests of the targeted customers by lifting the flag of the company high. In fact, the franchisees take it upon their selves to ensure that they satisfy the needs of the customers since they are also in a position to benefit from the revenue generated from their operations. The other advantage of the franchising strategy is that the franchisees stay with the people and they are in a better position to understand their needs and interests. They are also in a better position to understand their norms and values which in turn shape their behaviour and attitudes towards something. This knowledge of the culture of the targeted customers is very important as result of the fact that it shapes the purchasing behaviour of the customers. Therefore, if the targeted customers can identify with the organization in terms of culture and values, there are likely chances that they will purchase the products offered. This has also significantly contributed towards the success of McDonald’s in its operations in different countries across the globe. In other words, the operations of the company are standardized such that they appeal to the interests of the targeted customers. The main issue is centered around culture of the people in the market which makes the strategy of franchising ideal for the company which operates in different countries where there are also different cultures. This strategy of franchising also plays a pivotal role in maintaining the image of the brand in different places since it is focused on portraying itself as a unique product that cannot be matched by other products offered by other competitors in the market. This gives the company competitive advantage over other players in the industry.

Problems with franchising

There have been some concerns over the business strategy of franchising used by McDonald’s given that it has been facing some challenges of late. According to Nielson (2016), it can be seen that “overall, franchising is very important to McDonald’s profitability, although the growth of this business is coming under pressure, given market saturation in key developed markets.” For instance, in terms of McDonald’s profitability, it can be observed that its gross margin has been declining over the past four years, from 40.0% in 2010 to 38.9% in the LTM period. The company has also been experiencing problems with regard to increasing its gross margins due to cost pressure as well as its desire to maintain low cost margins to compete with peers in the local markets (Nielson, 2016). In the same vein, the other issue is that in the six-year financial summary given in the company’s annual report (2012) it is apparently clear that growth in franchised revenues, operating revenue, and net earnings has slowed since 2011. It is quite challenging for the company to continue improving its return on invested capital and return on incremental invested capital since it needs to be aggressive from an operational level (Nielson, 2013). The operations need to be reviewed for the benefit of the organization. 

The issue of declining revenue has also been observed by Jurevicius (2016) who noted that the company’s revenue was US$25. 413 billion in 2015, 7.4% decrease over US$ 27. 441 billion (2014) while profit was US$4. 529 billion (2015), 4.8 % decrease over US$ 4. 758 billion in (2014). These facts indicate that the company has been experiencing some operational challenges that can be partly attributed to its business strategy that is mainly oriented towards the aspect of franchising. Indeed, franchising is good for the organization but this strategy needs to be constantly reviewed in order to improve the viability of the organization in its operations. The decline of revenue witnessed in the past few years is an indication that there are certain improvements that ought to be made to the system which has been the mainstay of the success of the company in its operations across the whole world in different countries where it operates.

Competition

Apart from the operational challenges that can be attributed to the strategy of franchising, it can also be observed that the company also faces other challenges such as competition. The issue of competition in the fast food industry cannot be undermined since there are also other actors that offer similar products that can substitute those offered by McDonalds. As such, the company’s competitors include the following: Burger King Worldwide, Inc., Darden Restaurants, Inc., Doctor's Associates, Inc., Domino’s, Inc., Yum! Brands, Inc., Starbucks Corporation, Wendy’s Company and many other restaurant chains (Jurevicius, 2016). These competitors also offer products that can substitute the products offered by McDonald’s at competitive prices. It has to be noted that McDonald’s does not operate in isolation since there are also rival competitors competing for the same customers with this company. Competition is good for any business since it helps the companies to implement viable strategies that cannot be easily matched by other competitors. The other issue is that the customers have a wide selection of products to select from the market to fulfill their needs and interests. In case of McDonald’s, it can be seen that both company operated stores and franchises face challenges related to competition since there are many players in this particular sector. Some of them offer products that are attractive and preferred by the customers.

Porter’s Five Forces

Porter’s Five Forces model plays a significant role in trying to establish the lucrativeness of business in the industry. According to Nielson (2016), the barriers for entry are low for the fast food industry given that new entrants can easily penetrate the industry by virtue of the fact that it is relatively cheap to start business in the fast food industry. The other issue is that the customers also make decisions to purchase products on the basis of price and convenience which means that the buyers have purchasing power while on the other hand, the suppliers also have bargaining power (Nielson, 2016). This in other words means that McDonald’s cannot influence the market conditions that ultimately affect its operations. The higher costs of commodity prices have reduced the profit margins of the fast food industry which means that McDonald’s should contend with these challenges in the market since they also impact on its operations. The company has to make sure that it aligns its operational strategy such that it can be in a position to meet the constantly changing needs of the consumers.

Conclusion

Over and above, it can be noted that companies operate in a dynamic environment that is characterised by stiff competition. There are also other players which offer similar products offered by their rival competitors. This means that competition is intense and in order for the company to operate viably, it should implement unique strategies that cannot be matched by other competitors. Essentially, strategy is mainly concerned with doing better or outperforming the other actors in the industry. This means that he operational method that can be adopted by the company should be unique and it should also be in a position to appeal to the interests of the targeted customers. The strategy implemented by the customer also significantly plays a very big role in determining the success or failure of the company in its operations. In most cases, the company’s strategy is determined by the nature of business it is involved in since there are also other players that offer similar products. In the discussion above, it has been observed that McDonald’s utilizes the strategy of franchising in its operations where third parties pay franchise fees to use its trademark in doing their own business. This strategy has positively contributed to the success of the company in various countries it operates in across the globe. The main advantage of this strategy for the company has been that the franchisees are locals who have knowledge about the needs and interests of the targeted customers. The culture of the organization needs to be compatible with the values of the local people so that they can identify with it. Therefore, the strategy of franchising has given competitive advantage to McDonald’s in its operations across different parts of the globe. However, it has also been observed that of late, the company has been experiencing certain challenges with regard to its preferred strategy in its operations. For instance, its revenue from franchises has been declining over the past few years. The viability of the organization in different places has also been experiencing certain challenges that need to be reviewed in order for it to maintain its large market share in the fast food industry across the globe. Some recommendations suggested below can help the company to improve its operations against the challenges it face in its operations during the current period where competitors are also constantly increasing in the industry.

Recommendations

Whilst the strategy franchising has significantly contributed towards the success of McDonalds in its operations, it is recommended that it should also take into account other approaches that can contribute to its success. For instance, the company should also consider increasing the number of its own operated stores since this can go a long way in improving the revenue generated. This means that the avenues for revenue generation would be increased which can contribute to its improved viability.

Apart from the issue of declining revenue from the franchising strategy used by McDonald’s in its operations, the other issue can be attributed to the aspect of perception of its brand by the customers. There have been growing concerns pertaining to health by some sections of the society about the brand’s suitability for human consumption. According to EndAllDisease.com, “Every mouthful of McDonalds contains a handful of chemicals that raise ‘bad’ cholesterol levels, increase diabetes risk, lower immunity, and damage DNA,” (Nielson, 2013). No matter what strategy, this belief by the targeted customers can impact negatively on their interests to purchase the brand. Therefore, it is recommended that the company should be innovative in developing the image of the brand so that it can appeal to their interests. This can go a long way in complementing the strategy of franchising since this will create trust among the customers for the brand offered by the company. It is also recommended that the company should transform from its traditional practice and adopt people oriented goals so that it can improve its profitability. This can also go a long way in improving the viability of the company in its operations.